How will economy, Iowa borrowers be affected by impending Supreme Court decision on student loan forgiveness?

DES MOINES — Tens of thousands of Iowa student loan borrowers are awaiting a decision from the U.S. Supreme Court on President Joe Biden’s plan to forgive up to $20,000 in student debt.

The court is weighing a challenge brought by six Republican-led states, including Iowa, arguing the plan is unconstitutional, and is expected to decide on the lawsuit by the end of the month.

If the U.S. Supreme Court allows the loan forgiveness to go through, student loan borrowers without a Pell Grant would get up to $10,000 taken off their loan balance, while Pell Grant recipients would see up to $20,000 forgiven. The executive action is expected to cost around $400 billion.

According to the White House, 264,000 borrowers in Iowa applied or were deemed automatically eligible for relief as of January, before the program was halted by an appeals court panel. There were 169,000 fully approved applications. The White House estimated more 430,000 Iowa borrowers were eligible when the plan was announced.

Regardless of the decision in the federal case, student loan interest will resume Sept. 1, and required payments will resume in October. Iowa borrowers have an average of around $30,000 and hold a combined $13.2 billion in student debt, according to educationdata.org.

Peter Orazem, an Iowa State University economics professor, said not having to pay loans for the last three years was essentially a “net transfer of wealth,” because the monthly payment could be used for other things, and interest was not accruing.

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Because of that, borrowers should be better prepared to pay off their loans now than they were three years ago.

“Assuming that they incorporated this into their planning they should be in a better position now to repay debts because there's all these payments that they didn't have to make,” he said. “So that was sort of a net increase in their income. Now their income is going to return to what it would have been.”

Orazem said it is not clear how many borrowers have been spending the extra money, saving it or paying off their debt despite the pause.

In a Pew study from 2021, about half of respondents said they did not plan to make payments on their loans during the temporary pause. Another study showed borrowers who qualified for the pause tended to borrow more, increasing their car loans, credit cards and mortgage balances when compared with those who did not qualify.

“If that group put that money aside and invested it in a pension plan or something like that, they should be in much better shape than they would have otherwise,” Orazem said. “On the other hand, if they spent it then maybe they're not going to be in that much better shape than they would have.”

The same Pew study found nearly 60 percent of respondents said the savings on their loan payment was going toward needed expenses like rent and food. Sixty-seven percent said it would have been difficult to afford the payments if they resumed in the next month.

If the Supreme Court allows the plan to happen, the wide-ranging forgiveness could create inflationary pressure as spending and borrowing power are freed up among student loan borrowers, Orazem said. If borrowers use the forgiven $10,000 to borrow more money, that would drive up demand and increase prices of goods across the board.

Meanwhile, if the loan forgiveness is thrown out and payments resume, that is likely to restrict consumer demand as borrowers have less disposable income, which could have a downward pressure on inflation.

Other analyses have argued that the inflationary impact of forgiveness would be small, and the resumption of payments would offset the increases stemming from the forgiven debt.

Iowa politicians slam debt forgiveness

Iowa is one of six states in the Nebraska-led lawsuit that will decide the fate of billions of dollars in student loan debt. Gov. Kim Reynolds has been critical of the plan, and when the lawsuit was filed called the forgiveness proposal an “insult to working people that must be stopped.”

Two Democrats joined Senate Republicans in a vote earlier this month seeking to overturn the loan forgiveness plan, but Biden vetoed the resolution.

“I’m grateful the Senate came together to fight this socialist scheme and do what’s right for hardworking taxpayers across the country,” Iowa U.S. Sen. Joni Ernst said in a statement at the time.

In a statement announcing the veto, Biden said the forgiveness plan would help borrowers recover from the economic impact of the COVID-19 pandemic.

“It is a shame for working families across the country that lawmakers continue to pursue this unprecedented attempt to deny critical relief to millions of their own constituents, even as several of these same lawmakers have had tens of thousands of dollars of their own business loans forgiven by the Federal Government,” the statement said.

Iowa U.S. Sen. Chuck Grassley said last week he hopes the Supreme Court will overturn the plan, which he described as a transfer of debt to the American taxpayers.

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As an alternative, Grassley joined several Republican senators last week in introducing a legislative package they said would lower college costs and student debt. The legislation would require more transparency in financial aid offers, require more loan counseling for students and limit how much undergraduate and graduate students can borrow in certain cases.

“Republicans want to empower students to pursue higher education costs without breaking the bank,” Grassley said in a news conference.